A futures market or exchange is a global central financial exchange in which individuals can trade standardized, pre-defined future contracts agreed by the exchange to settle at a future date. The primary participants in this market are financial companies, banks and other financial institutions that participate in the buying and selling of futures contracts. Futures contracts allow participants to speculate on the market direction and price movements in specific markets. In other words, futures provide information participants need to make informed decisions.
Many traders have become aware of the benefits of market futures. These traders may purchase or sell the bonds, currencies, interest rates or stock indexes in the expectation of a rise or fall in value. There are also market futures for commodities such as food grains, fish, metals, and electricity. Commodity market futures are contracts for the sale or purchase of a particular commodity.
Most investors use market futures to speculate on the underlying equity index of the companies they own. This speculation results in the purchase of a stock that has the potential to gain in value or to depreciate. It is considered a high risk venture, as the prices fluctuate widely. Investors often use market futures to protect themselves against financial setbacks that might occur during a financial bull market.
Some market futures contracts allow traders to sell programs that give them a cash value up front and guaranteed to sell within a set time frame. They may also be called buy-sell programs. The underlying index, when the program is made, is also known as the margin. When the value of the underlying index is higher than the value of the contract, the trader makes a profit; when it is lower than the contract, the trader has to sell the contract early and get paid the difference in cash. Buy-sell programs are used by traders who do not want to risk their cash.
There are some market futures contracts that allow the trader to hedge their exposure to the equity index. These contracts are known as equity swap contracts. A typical equity swap contract gives the trader a certain interest rate, called the “swap rate”, in return for putting up certain assets as collateral. These are the safest forms of trading with derivatives because the risk of loss is limited to the amount of the collateral and the duration of time until which the derivative will mature. However, they are very risky because the longer the stock or other underlying asset stays idle, more risk is added to the overall value.
Commodity Futures allows traders to trade in commodities that have a physical presence. They are traded in much the same way as stock, although the delivery date is not fixed. Traders who buy commodity futures contract will pay for the commodity at the time it is delivered, while holding the rights to sell for a pre-determined price later on. They will need to be ready to sell their contracts before the expiry date if they want to exercise their option to purchase the underlying asset.
These contracts are popular in the stock market because they do not require any initial cost. This means that even the most inexperienced traders can start earning money if they invest their savings for a few months. However, they incur expenses in the form of brokerage, transaction fees, and commission for every trade that is executed. The trading price of these contracts is determined by the underlying index and not by the speculator. It therefore follows that there is no guarantee that they will earn a profit; but there is some sort of guarantee that they will incur expenses if they lose.
The risk associated with market futures contract depends mainly on the level of the market volatility and on the length of time until the expiry date. If the volatility level is high, this means that the prices can change quickly and investors would have to be ready to make quick decisions. In this case, they could decide to hold on their shares for a little longer or to sell all of them at once in order to gain maximum profit. The duration until the expiration date also has a bearing on the risk. It is recommended that people stay away from short term trading hours and choose the fixed trading hours to execute their option.